What Is Indemnity And What Does It Mean?

Posted on May 08, 2015

“Indemnity” is the legal obligation of a person or entity, the indemnitor, to provide compensation for a specific loss suffered by another person, the indemnitee. The right of indemnity may result from an express agreement or contractual provision, or from an implied contract within the context of a relationship wherein one party is found to be vicariously liable for the acts of another.

The most common form of indemnity, and most recognizable, is that underlying most insurance policies. For example, car insurance usually requires to the insurance carrier to indemnify the policyholder for certain types of loss arising from operation of the car, such as damage to the vehicle or for medical expenses incurred as the result of an accident.

Understanding what indemnity agreements are and how they operate is particularly important in the construction industry, as indemnity provisions have become nearly ubiquitous in construction contracts. The following is an example of an indemnity clause that might be found in a construction agreement:

To the fullest extent permitted by law, contractor shall indemnify and hold harmless the owner and architect, their agents, consultants and employees from all claims for bodily injury and property damage that may arise from the performance of the work, including reasonable attorneys’ fees, costs and expenses, to the extent caused by the acts or omissions of the contractor or its employees.

Although such provisions are found in nearly every construction contract these days, little thought is given as to what they mean or to the consequences of agreeing to indemnify another person or entity for certain losses. However, it is critical that construction professionals know and understand the indemnification provisions in their contracts, especially because, under Ohio law, certain indemnification agreements are unenforceable in the construction context.

Specifically, clauses in construction contracts that indemnify “against liability for damages arising out of bodily injury to persons or damage to property…caused by the negligence of the promisee” have been declared void and against public policy by Ohio Revised Code § 2305.31. What this means is that an owner cannot require a contractor to indemnify him for injuries caused by the owner’s negligence. Take for example, the indemnification provision discussed above. With a minor tweak to the language, it becomes unenforceable:

To the fullest extent permitted by law, contractor shall indemnify and hold harmless the owner and architect, their agents, consultants and employees from all claims for bodily injury and property damage that may arise from the performance of the work, including reasonable attorneys’ fees, costs and expenses, to the extent caused by the acts or omissions of the owner.

All that changed was the last few words of the provision, but that small modification drastically changes its legal effect. Whereas before, the contractor was agreeing to compensate the owner for its own negligence, in this modified version, the contractor would be agreeing to compensate the owner for the owner’s negligence. This is exactly the type of agreement Section 2305.31 is designed to address, because the objective of the anti-indemnity statue is to ensure that the risk of liability remains with the negligent party.

Although contractors can rest easy that, to some extent, they are protected from onerous indemnity clauses of by provisions of Section § 2305.31, other business owners do not enjoy such security. This is why it is imperative that all Ohio business owners consult with experienced legal counsel during the consideration and negotiation of their contractual agreements. For questions regarding indemnity clauses, general contractual provisions, or any other aspect of Ohio construction or business law, please contact Todd Harpst or Nick Horrigan, at Harpst Ross, Ltd. – Business Lawyers for the Construction Industry®, at (330) 983-9971 or tharpst@harpstross.com or nhorrigan@harpstross.com.

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